Alps Alpine Has A Lot To Prove To Rebuild Investor Sentiment

 

The performance of Alps Alpine (OTCPK:APELY) (6770.T) has been pretty awful since my last update, as the shares have been hit hard by both weakness in auto build-rates and weaker margin guidance from management. Establishing sustainable profitability, particularly in the higher-margin camera actuator business, has proven to be a challenge beyond management so far, and guidance for this current fiscal year doesn’t suggest an immediate improvement.

Buying beaten-up stocks means buying in when things still look pretty ugly, and that is the case here. While I do think auto build-rates will improve from here, whether or not Alps Alpine can develop the auto infotainment products needed to be a real player in future models is very much an open question, as is management’s ability to significantly improve auto electrical component margins from here. Likewise, it remains to be seen if Alps can reach some sort of equilibrium between market share and margins in the actuator business, or whether this will remain an unpredictable and volatile business.

Alps Alpine has not earned any benefit of the doubt, and my recommendation here is really based on “if you believe they can do X, then…”. Despite the disappointments of the last fiscal year, the company didn’t finish too far off my revenue and EBITDA assumptions, and future revenue growth of 2% to 4% with FCF margins around 3% can support a meaningfully higher share price than today’s price.

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Alps Alpine Has A Lot To Prove To Rebuild Investor Sentiment

The Street Hasn't Fully Embraced Alps Alpine's Recovery Story

COVID-19 has made life difficult for almost everyone, and Japanese electronic component manufacturer Alps Alpine (OTCPK:APELY) (6670.T) is certainly no exception. While the company had been enjoying some solid momentum in its smartphone camera actuator business, COVID-19’s impact on the auto industry has hammered the company, leading to a poor performance since my last update. Unlike many companies that have seen a hit from COVID-19, though, Alps Alpine shares haven’t recovered to the same extent.

There are certainly long-term risks to consider here. While Alps Alpine enjoys very strong share in optical image stabilizers (or OIS), it’s a highly competitive market. Likewise, management has the unenviable task of simultaneously reducing costs in its auto business while also repositioning that business toward advanced sensing, connectivity, and human-machine interface. Still, I believe the valuation is low relative to even modest expectations, and with smartphone and auto volumes picking up for the remainder of the year, these shares could do better.

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The Street Hasn't Fully Embraced Alps Alpine's Recovery Story

Better Cameras Mean Better Opportunities For Alps Alpine

Not only has the 2019-2020 smartphone cycle gone better than expected for component suppliers like Japan’s Alps Alpine (OTCPK:APELY) (6770.TO), the outlook for the next couple of years has improved meaningfully, with more OEMs guiding to meaningful upgrades in their camera offerings. With OEMs realizing that cameras are an important point of differentiation with consumers, Alps Alpine looks set to benefit from improving sales of more sophisticated camera actuators while the auto business bottoms out.

That stronger camera actuator outlook has done wonders for the stock, sending the shares up almost a third since my last update on the company. I thought the shares were undervalued then, but I underestimated how quickly sentiment would shift on the fall introduction of Apple’s (AAPL) new lineup (among other OEMs). While the shares may not be quite so undervalued now, the improved actuator outlook does drive value and the shares still offer attractive annual return prospects from here.

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Better Cameras Mean Better Opportunities For Alps Alpine

Alps Looking At A Steeper Climb For Growth In The Near Term

Alps Alpine (OTCPK:APELY) (6770.T) has been one of the most disappointing calls I’ve made in recent time, as the shares are down about one-third since my last article, with the company seeing even weaker than expected volumes for its camera actuators to go along with a general downturn in the auto sector. Making matters worse, actuator volumes aren’t likely to get better soon, while newer, higher value-added auto components aren’t likely to contribute meaningfully for a few years.

I’m not keen on doubling down on a bad call, but Alps Alpine does look undervalued even on what I believe to be conservative assumptions. Even with a weaker long-term addressable market in smartphones, I think the auto business can drive 2% to 3% long-term revenue growth, with mid-single-digit FCF margins supporting a fair value close to $45/ADR. Investors should note, though, that the ADRs are illiquid.

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Alps Looking At A Steeper Climb For Growth In The Near Term